There are, though, hiccups in the broader markets—ones that
bear monitoring and that go beyond the questions of Libor. The
voices warning that trade frictions could eventually affect a still-sanguine Wall Street and the larger trend of strong economic
growth are getting louder.

The International Monetary Fund recently warned that theglobal expansion that began two years ago has plateaued andbecome less balanced. According to IMF officials, “We continueto project global growth rates of about 3.9% for both this yearand next, but judge that the risk of worse outcomes hasincreased, even for the near term.”Perhaps more worrisome to those in the CRE industry was astatement made by BlackRock’s Larry Fink on the same daythat the IMF issued its warning. The CEO told reporters thathe believed stocks could drop 10% to 15% and US GDP growthwould slow next year if the Trump administration carriesthrough with all the trade threats it has lobbed.

Indeed, tit-for-tat responses by trading partners could affect
nearly $870 billion in total trade, accounting for a little more
than 22% of US total trade and 5% of world imports, according
to a report by CBRE Capital Markets.

So far, the industry has come through this chaos relatively
unscathed. Should the trade disputes escalate, though, it will
likely result in less demand for industrial space since imports
require more space than exports, the firm warns. “Disruptions
to supply chains that were developed under the free-trade
agreements may accelerate the automation of US industrial production, reducing the absorption of factory space,” report
CBRE analysts.

Capital flows would be affected as well, according to BenEmons, chief economist and head of credit portfolio manage-ment at Intellectus Partners. He recently highlighted the inver-sion in some currency volatility curves, per a report inBloomberg: “The higher the short-term foreign exchange (FX)volatility, the harder to currency-hedge international bond andstock portfolios. That leads to a ‘return to the base’ by reducingrisk such as emerging market exposure and dialing down FXpositions to the home currency.”Translation: The number of funds willing to lend or investacross borders would decline.

CROSS-BORDER DEALS, LOCAL FINANCING

For many firms, this wouldn’t be a problem since projects often-times tap local funding. Travel and hospitality conglomerate Apple
Leisure Group has properties spanning from Mexico to the north
of South America, explains Javier Coll, EVP and chief strategy officer. “There are very few US companies financing projects in the
Caribbean or Mexico,” he says. “So what usually happens is you
finance a project with local banks.” Count him as unperturbed.

But there doesn’t need to be a trade war to slow cross-border
debt and equity finance; sometimes just one country can do that all
on its own. For example, last year Chinese investment in US real
estate slowed following the imposition of capital controls. There
were other factors at play as well,
namely the growing attractiveness
of other markets (the UK saw an
uptick in Chinese capital that
same year) as well as the US’ own
stepped-up scrutiny of Chinese
transactions. As such, the spigot
on debt and equity capital coming
into the US from China has been
virtually turned off after years of
flowing at maximum velocity.

It is not just China either: last
year sovereign wealth funds
scaled back their investment in
the private markets due primarily to a growing sense of real
estate fatigue, according to the International Forum of
Sovereign Wealth Funds. Direct real estate and infrastructure
investments made by SWFs declined from a total of $25 billion
in 2016 to $23.2 billion in 2017. The property sector specifically
was an almost 40% drop in the number of private investments
during those two years.

One reason for the slowdown in real estate investments is that
some of the recently-established funds, such as Italy’s CDP
Equity, have a mandate to develop their home economies. But
the primary reason for the decline: SWFs are finding it more
difficult to buy properties as more institutional investors have
recently entered the sector increasing competition for high-quality assets and pushing asset valuations higher.

“A HIGH LEVEL OF LIQUIDITY”

None of this is to suggest cross-border liquidity is at risk of dry-ing up. In its first-quarter investment outlook, JLL noted thatwhile activity from Mainland Chinese buyers has ground to ahalt, investment from other Asian countries should be pro-nounced this year. Most tellingly, it added: “At the same time, wecontinue to see a high level of liquidity in the equity capitalmarkets from global investors.”Much of this comes from the giant US-based private equityplayers. One of the most notable of these is the BlackstoneGroup, which has doubled down, almost literally, on its invest-ment capacity for Asia’s property markets. Earlier this year ithad the final close of its second Asian opportunistic real estatefund, Blackstone Real Estate Partners Asia II, reaching its hardcap with approximately $7.1 billion of commitments. The fund

“Recourse requirements have come
in dramatically for projects. It’s
now possible to have a repayment
guarantee of 15% to 20%.”